Gulf Power applied Feb. 11 at the Florida Public Service Commission for approval of a negotiated Energy Purchase Agreement with Morgan Stanley Capital Group and the recovery of costs to be incurred under the agreement through the Fuel and Purchased Power Cost Recovery Clause.
The agreement is expected to provide multiple benefits to Gulf Power and its customers including, but not limited to, substantial cost savings over the term of the agreement, reduced exposure to future fuel cost increases and fuel cost volatility, renewable environmental attributes (including renewable energy credits (RECs)) and promotion of new renewable wind energy generation. Gulf Power is a unit of Southern Co. (NYSE: SO).
On Dec. 18, 2014, Gulf Power and Morgan Stanley executed the energy purchase agreement, which is for a term of approximately 20 years subject to early termination provisions, including a termination provision for failure to obtain commission approval of the deal. Specifically, Article 2 of the agreement provides a termination right in the event that the agreement is not approved in its entirety by the commission through a final non-appealable order within 240 days of filing.
“Time is of the essence with regard to Commission approval because the wind facility to be constructed as a result of this Agreement must be in-service on or before December 31, 2015, as indicated in the latest Internal Revenue Service guidance, in order to ensure the project qualifies for federal production tax credits (‘PTCs’) established under Section 45 of the Internal Revenue Code,” Gulf Power noted. “Failure to qualify for the PTCs could jeopardize the economic viability of the wind project.”
The agreement obligates Morgan Stanley to deliver to Gulf Power a fixed number of megawatt hours (MWh) in each hour of each month of each year. In this way, the agreement insulates Gulf Power from the usual variations of wind energy production. On an annual basis, Morgan Stanley’s energy delivery commitment totals 674,437 MWh. This equates to approximately 5.5% of Gulf’s total annual jurisdictional energy sales forecasted for 2016. Gulf, in turn, is obligated to pay for energy delivered under the agreement at predetermined pricing. Pricing is fixed for each calendar year of the term of the agreement. Gulf Power will pay for energy, but not capacity, under the agreement. Gulf Power is only required to pay for energy which is received on the Southern Companies Transmission System.
Morgan Stanley’s energy delivery commitment is shaped to match the projected hourly and monthly output of a 178-MW portion of a facility known as the Kingfisher Wind Farm that is to be constructed in Kingfisher and Canadian counties, Oklahoma. On Jan. 21, 2015, Morgan Stanley entered into an agreement with the owner of Kingfisher, Apex Clean Energy, for Morgan Stanley to financially hedge the energy output of the facility, as well as to receive the environmental attributes – including RECs – associated with the facility’s energy output.
In addition to receiving fixed physical energy deliveries as set forth in the agreement, Gulf is entitled, at no additional cost, to receive all environmental attributes, including RECs, associated with each megawatt hour of energy which is required to be delivered under the agreement. RECs will be sourced directly from Kingfisher, or, if the energy output of Gulf’s portion of Kingfisher falls below Morgan Stanley’s energy delivery commitment to Gulf, from other comparable wind facilities. Gulf has the flexibility to either utilize the RECs to serve its customers with renewable energy (thus retiring the RECs), or retain the RECs for potential compliance obligations or sales to third parties. To the extent that RECs are sold, any revenues generated from the sale of RECs will be credited to Gulf’s customers through the Fuel and Purchased Power Cost Recovery Clause.
Under the agreement, Morgan Stanley bears all risks and responsibilities, including congestion charges, locational marginal pricing, and transmission curtailments, associated with delivering energy to the Southern Companies Transmission System. With limited exceptions, failure to deliver hourly energy in amounts specified in the agreement will result in Morgan Stanley paying cover costs to Gulf Power, or, if Morgan Stanley fails to pay such cover costs or the failure to deliver energy exceeds certain limits, Gulf Power has the right to declare the contract in default and Morgan Stanley must pay a termination payment.
The Kingfisher Wind Farm is expected to have a full nameplate capacity of about 300 MW, 178 MW of which have been designated for the agreement with Gulf Power.
First Reserve, the largest global private equity and infrastructure investment firm exclusively focused on energy, announced Jan. 22 that it has agreed to acquire the Kingfisher Wind project from Apex Clean Energy. Kingfisher Wind is scheduled to be completed in 2015. Financial terms of the transaction were not disclosed.